States can grant regulatory authority to local governments to amend zoning and tax laws to increase housing affordability and not put a hole in city budgets
In this paper we explore three approaches to solving the growing housing affordable housing crisis. First, I summarize some of the arguments that have been made for broad-scale up-zoning, creating opportunities for developers to build moderate density affordable housing types. This is followed by examples from cities that have implemented broad-scale up-zoning by eliminating exclusive single family zoning. I then propose a second step, extending the first opportunity to purchase to qualified non-profit housing organizations whose sole purpose is to expand non-speculative affordable housing. Finally, I introduce land value taxation as a means to expand the volume of land parcels potentially available for redevelopment. Much of this writing is appropriated from scholars who have written extensively on these subjects.
Employ broad-scale up-zoning
Shane Phillips, Housing Initiative Project Manager for the UCLA Center for Regional Policy Studies wrote an article titled He states that U.S. cities during much of the middle and late 1900s effectively reduced the capacity for new housing by extensively downzoning neighborhoods or never allowing higher densities in the first place. This led to a shortage of housing supply and rising home prices in high-demand locations. Cities where housing is in high demand are now dominated by single-family-only zoning, sharply limiting new housing production that is affordable.
The difference between a city’s current housing stock and its estimated zoned capacity is what Phillips calls the “zoning buffer,” expressed as a ratio. Before 1960, the buffer in both New York and Los Angeles was at least 300 percent; at that time zoning regulations allowed 3 times the volume of existing housing units. The ratio fell to roughly 50 percent after the 1961 zoning update in New York City, and to just 12 percent in Los Angeles in 2010. Phillips makes the case that these smaller zoning buffers are insufficient to improve long-term housing affordability, and that a large buffer (achieved by expanding zoned capacity) may be critically important for achieving this goal.
Daniel Herriges, in his article “What Would Mass Up-zoning Actually do to Property Values?”, sets up a similar hypothesis. Broad-scale moderate density up-zoning applied to an entire city at once could open up tens of thousands of new potential development sites available to accommodate pent-up housing demand. It’s a mathematical certainty that in the medium term only a fraction of them will be redeveloped; hence the need for a large zoning buffer. The development that does occur will tend to converge into sub-areas where buyer demand and developer profits are highest. Nevertheless, neighborhoods throughout a city would be open to conversions to duplex, row housing, and other moderate density upgrades.
By way of contrast, local government policies have often adopted the targeted up-zoning model, forcing development into a few small, targeted areas. When redevelopment authorities create urban renewal districts, they implement this concentrated density policy, yielding to the pressure to enlarge the property tax base to capture sufficient tax increments to pay off revenue bonds. Rising land values in limited areas approved for urban renewal result from an over-reliance on building “tall” in a small number of high-growth areas. This leads to a lack of units suitable for larger households, and sometimes a mismatch between population density and the provision of infrastructure and services such as transit, schools, health, and parks and recreation.
Imagine the consequences of up-zoning small pockets of the city for high density development. As Herriges asserts, a few districts would absorb all the development pressure from a much larger area around it that has not been up-zoned. You would see large-scale construction and a “speculative feeding frenzy” on land. You’d likely see some property owners selling to large scale developers, and others holding out for windfalls from escalating land values, driving prices up to a point where only luxury units would be feasible. If affordability is a requirement in urban renewal districts, some units would have to be heavily subsidized.
Now suppose you enlarge the zoning buffer to include many more properties, disperse the rezoning to include predominantly single family neighborhoods, and further restrict the allowed redevelopment to moderate density levels. Would this rapidly drive up land values and trigger speculation? The short answer is no. Those who warn of this outcome are committing a classic “” This is a logical fallacy in which you assume that something that applies to the individual parts must also apply to the whole.
What is true: Up-zoning a property, all else being equal, increases its market value substantially. What’s not true: Up-zoning all or many properties will substantially increase the market value of every property.
Eliminate exclusive single family zoning
As Phillips states: broad-scale up-zoning allows housing development that is somewhat denser than existing land uses and allows it on many parcels throughout the city. This benefits both small scale market-rate and income-restricted housing developers, who are the builders of The latest wave of zoning reforms throughout the U.S. permit density increments above single family housing; typically some version of duplexes through fourplexes and row housing. To date, eight states have passed legislation preempting local zoning ordinances to eliminate exclusive single family zones. Rather than setting off a wave of speculation, conversions to moderate density housing types have been gradual and widespread.
In August 2020, Portland City Council passed the Residential Infill Policy (RIP) zoning code reform legalizing duplexes, triplexes, and backyard cottages. Before 1970 it was common to see these moderate density housing types interspersed within the city’s residential neighborhoods. By making it once again legal to build these small homes in predominantly single family areas, Portland has opened the option for residents who want something in between an apartment building and a freestanding house.
In June 2022, Portland’s RIP2 was unanimously approved, expanding housing opportunities in Portland’s historically low-density outer eastern areas and the West Hills, adding allowances for attached houses and cottage clusters across all neighborhoods, and increasing the allowable internal floor area and minimum lot size in order to accommodate duplex, triplex, and fourplex buildings.
The RIP up-zone will evolve as a gradual process giving homeowners or developers who find it advantageous an opportunity to take this option. Making this option city-wide does not open a flood gate for higher density housing; nor is it likely to push up land prices because rebuilds to moderate density would occur over time, and would be widespread rather than concentrated in a particular neighborhood. The RIP code amendment is one modest measure in the ‘abundant housing’ toolbox. What would have been a new McMansion might instead be four townhome units. The construction methods and economics are similar, but the result is a greater amount of somewhat less expensive housing.
This latest manifestation of broad-scale up-zoning is sweeping across the North American continent. In British Columbia, the Vision Vancouver political party recently released its housing platform, demanding an end to low-density housing zones in the city and opening up all neighborhoods to low and mid-rise housing. To expedite the permitting process, the party would also do away with advance public consultation on all non-profit and public co-op housing projects. A three-month permit guarantee would also be given to single-family homeowners wanting to densify their lots with an auxiliary unit, duplex, triplex, or laneway house. Any project that is valued at under $50,000 would also have to be approved within three months. It isn’t surprising that that zoning reform is immensely popular with the public. A 2019 opinion poll found that 71 percent of Vancouver residents would support 3–4-story apartments in neighborhoods that currently only permit detached houses.
Prior to the recent wave of zoning changes abolishing exclusive single family zones, many cities increased the prospects for affordability by amending their zoning laws to mandate the inclusion of below market rate units in large multifamily developments, called set-asides.
The first successful court-tested inclusionary zoning policy, adopted in Montgomery County, Maryland, mandated that developers of more than 50 units of multi-family housing set aside 12.5 to 15 percent of their units at prices affordable to residents within 50 to 80 percent of median income.
Following the repeal of an Oregon State prohibition of mandatory inclusionary policies, Portland City Council approved Zoning Code amendments to implement an inclusionary housing program applicable to development projects of 20 or more units permitted before 2019. A ten-year property tax exemption is granted for projects including 20 percent of the IH units at or below 80 percent of median family income, or 10 percent of the IH units at or below 60 percent MFI.
Following a favorable vote by the Union of B.C. Municipalities, the province’s municipalities are now enabled to adopt Mandatory Inclusionary Housing Bylaws. Patrick Condon at the University of British Columbia is among the proponents of zoning strategies that achieve deeper affordability and who argue that inclusive zoning requirements do not increase the price of market units in the same project, but rather lower the “residual value” of the land under the project.
Thus, Condon is also in agreement with Herriges and Phillips who maintain that single projects scattered throughout a city will not increase the market value of every property. Rather, inclusive zoning requirements put a brake on the out-of-control urban land price inflation rates of 200 to 1,000 per cent seen in Vancouver in recent years. Requiring set-aside units reduces the windfall that institutional investor-owners reap by taking purchase options and holding onto sites in locations experiencing rapid land value inflation. Because this requirement represents a marginal loss to the developer proportional to the parcel’s potential in the absence of the requirement, they will have to pay less for the land for their project to remain profitable.
Broad-scale up-zoning benefits both market-rate and income-restricted housing developers, and favors small-scale developers who are the builders of “missing middle housing,” a style that is more welcome in many neighborhoods than taller, denser developments.
Expand first opportunity to purchase
By amending zoning codes, local authorities are given new opportunities to build housing at medium densities. Following that, how can we boost the volume of infill development that is affordable? Minneapolis changed its zoning to allow triplexes citywide in 2018, but thus far only about 70 units have been produced. Since 2019, the Portland Bureau of Development Services has received about 80 applications for 3-4 unit conversions. The new RIP2 zoning code amendment may nudge up these numbers, but probably not by much.
Over the past several decades, billions of dollars in public resources have been invested in the development of publicly supported housing, most of it held in private hands. Federal assistance programs include HUD assisted mortgages, project-based rental assistance contracts, low-income housing tax credits, and other subsidy programs. Facing an ever-growing housing crisis, we cannot accept the loss of these existing affordable homes.
But when rent-restricted properties come to the end of their subsidy contract, owners may elect to convert them to market rate rentals or other uses. According to the Oregon Housing Preservation Project, between 1996 and 2016, over 3,500 units were lost in the state due to the mortgage having been paid off, foreclosure, or the owner deciding to opt out of an affordability contract. Nationally, for every new affordable home developed, three are at risk of loss either to disrepair or conversion to market rate.
One way to stem this tide is to transfer older affordable multifamily properties to new private owners or public or quasi-public owners. Here is an opportunity to adopt a local ordinance requiring owners selling their residential properties to extend the first opportunity to purchase to qualified developers and property managers.
In 2017, Oregon House Speaker Tina Kotek (now Governor) believed Oregon should be doing more to safeguard our existing affordable rental housing. The Speaker worked with affordable housing industry stakeholders, advocates, and local governments to craft a bill, HB 2002, that would expand and strengthen existing law and provide new tools to help preserve Oregon’s publicly‐supported housing.
Administered by Oregon Housing and Community Services (OHCS), HB 2002 carries out four major objectives: 1. Creates a statewide inventory of government supported affordable housing; 2. Requires property owners to give 2-years notice of expiring affordability contracts; 3. Obligates property owners to provide OHCS the legal opportunity to purchase expiring units; and 4. Provides OHCS the right of first refusal for new publicly supported housing contracts.
In 2013, Maryland’s Prince George’s County Council passed CB 27-2013 which created the Right of First Refusal Program to expand the availability of affordable rental housing in the County. The code provides that a property owner who seeks to sell a multifamily rental facility that consists of 20 or more dwelling rental units must provide written notice of the sale and related documentation to the Director of the Department of Housing and Community Development after the owner enters into a bona fide contract of sale to sell the multifamily rental facility. DHCD is authorized to exercise its ROFR rights and purchase the property or assign its rights to purchase the property to a qualified third-party multifamily developer-owner.
Public rights of first refusal give the local government a guaranteed opportunity to acquire property, without mandating that it necessarily do so. The imposition on property owners is minimal. They retain the use and enjoyment of their property and control the decision of when to sell and at what price. This achieves a balance of individual autonomy with social goals.
In 2011, the Treasurer of Wayne County, Michigan, adopted an aggressive new tax-collection strategy, stepping up enforcement of tax liens and foreclosures. This strategy, coupled with property assessments that had not been revised downwards although property values had fallen dramatically, resulted in the foreclosure of one in every four properties in the city. As a result, many families in the remaining occupied homes faced eviction as a result of outstanding tax bills.
In an effort to avoid the severe consequences of eviction, the City of Detroit partnered with a nonprofit housing organization to create a new buyback program using the right of first refusal. The program aims to keep residents in their homes by purchasing delinquent properties from Wayne County and then transferring them to local nonprofits, which work with residents to establish repayment plans. Under Michigan law, municipalities have a right to buy tax-foreclosed properties from the counties in which they are located, which guarantees that a city will not lose them to outside investors.
Economists and community activists around the country are now making the case for expanding the transfer of properties to public or quasi-public owners, and calling for housing ownership models that remove dwelling units from the private market, claiming that affordability over the long run can only be sustained by controlling land prices. Community Land Trusts (CLT) like Portland-based Proud Ground are a prime example of social housing, offering a more stable form of tenancy through the perpetual ownership of land titles. The non-profit CLT pledges to undertake any repairs needed and manages the building for a 99-year term. Existing occupants retain ownership of their unit; new occupants also become owners of their unit exclusive of the land. Owners may sell at any time, and the CLT retains a predetermined portion of the equity gained from the increase in land value, thus placing a damper on rising land costs.
Tenant opportunity-to-purchase policies will not necessarily create new housing units, but they will slow the process of displacement. If municipalities are required by law to extend the right of first refusal to qualified non-profit housing organizations––with CLTs given highest priority, this will keep a segment of the housing stock out of the speculative market and expand social housing’s proportion of total housing supply.
Introduce land value taxation
Transferring housing units to the non-profit and public sectors may be the better option, but American cities have been slow to act. Can the experience of European countries offer valuable lessons?
In France, the Loi relative à la Solidarité et au renouvellement urbains (SRU) law mandates that many urban jurisdictions dedicate at least 25 percent of their overall housing units as social housing by 2025. The SRU is a stronger affordability mandate than any U.S. state has implemented, and it goes beyond the inclusionary zoning rules in place in many cities because it applies not just to new construction but rather to all housing units.
A hundred years ago Vienna was a city run by landlords; renters had no protections, no cause evictions were swift and without recourse. Then with the fall of the Austro-Hungarian Empire the political left gained power. Unlike leftist parties in other parts of Europe, government officials did not set out to destroy capitalism by nationalizing property. Instead, they used a taxing strategy to meet their social ends. Their most notable achievement was providing decent housing for every resident.
Exercising rent control, the Viennese government outlawed raising rents beyond a minimal amount. This disincentivized the private development of rental buildings. By effectively removing landlords from the urban land market, prices fell, allowing the city to buy land at a much reduced price. The city quickly became the dominant developer of new permanent social housing managed by cooperatives or non-profit housing corporations. In the late 1920s, about 30 per cent of Vienna’s annual budget was spent buying land and financing housing construction.
It was mostly taxes on private property and land that financed this endeavor. Very high taxes were also levied on vacant land, giving landowners extra incentive to sell. These policies eliminated land speculation from the property market and kept land in the hands of the people who live on it. Today, rents in Vienna are a quarter that of similar units in Paris.
While these policies have proven to be effective, the American political environment is currently not amenable to adopting such measures. Nevertheless, the European experience offers some hints at workable solutions. What might be most effective on this continent is a fiscal mechanism that will greatly expand the opportunity to create new housing units and dampen land speculation, the primary driver of escalating housing prices.
Paradoxically, the apparent solution has its origin in the late 19th-century United States. In many ways, our current private property market resembles that of the Gilded Age. The public figure who is relevant even today is Henry George, a journalist and political economist. Through a careful examination of privilege, rights, and the sources of economic inequality, he inspired millions worldwide to fight for a freer and more just society.
George realized that the systemic problem lay in the monopolization of the earth’s resources which were being captured through private land ownership. As urbanization increased, the value of the land also increased. The result was soaring land values which soaked up the gains in productivity, leaving workers impoverished. The primary beneficiaries of this process were landowners. In his 1879 book Progress and Poverty, he argued that the earth and its natural resources belong to mankind in common. George believed that people own what they create with their labor. Because no one created the land, the land belongs to everyone in common.
The remedy George proposed was to replace other taxes with a Land Value Tax (LVT). This is a tax on the value of land exclusive of improvements on it. Unlike conventional property taxes, which penalize new development and building upgrades, LVT discourages land speculation and incentivizes landowners to put land to productive use. Thus, urban land markets are opened up by making underdeveloped sites more readily available for commercial and housing development.
We have already made the case that broad-scale up-zoning will not elevate land prices. But up-zoning alone is not going to solve the housing crisis. Now we can build on this legal mechanism by amending state property tax laws to authorize a local option land value tax.
The next key to providing affordable housing is finding inexpensive land. The most simple and effective way to drive down the cost of up-zoned land is to place a high tax on land assessments and reduce the tax on improvements. The split-rate tax is a modern variant of George’s single tax that has become more commonly applied in the U.S. since Pittsburgh and Scranton in Pennsylvania adopted it in 1913.
A working paper by Yang and Hawley examined the value impacts of a split-rate tax in Pennsylvania cities over the 2011-2017 period. Their model mostly agrees with expectations, concluding that land values could be expected to fall by about 2 percent if a municipality implements a split-rate tax, taxing land at twice the millage of buildings. They also examined the effect of split-rate taxation using the total property value. With building values included, residential properties showed high variability in value change, whereas aggregate commercial property values were estimated to rise up to 10.6 percent after implementing the split-rate tax policy. Such findings have implications for cities attempting to revive commercial districts and raising the property tax base.
Several prior studies of Pennsylvania municipalities adopting LVT reveal that in the ensuing years the dollar values of building permits issued increase markedly, and then steadily rise, despite a fall-off in construction and renovation in surrounding counties. Empirical studies also showed that vacant lot sales increase after the land tax is levied, indicating that the tax put pressure on inefficient landowners to develop their sites.
Variations of the Georgist land tax have been in effect in other countries, including Australia, New Zealand, Taiwan, Denmark, Estonia, and South Africa. The Center for Property Tax Reform is currently helping state and city officials in New York, Connecticut, Virginia, Minnesota, and Hawaii to usher in enabling legislation, thus expanding LVT into jurisdictions beyond Pennsylvania.
The financial incentive effect of LVT is simple. Economists have shown definitively that changes in property tax rates would be capitalized into the value of the property. For example, a study of the tax reducing effects of Proposition 13 in California looked at pre and post Prop 13 data and found compelling evidence that the reduced property taxes were in fact capitalized into the property values. A one dollar decrease in property tax in California led to a seven dollar increase in property value.
The same dynamic inversely holds true for land and building values independently. A high land tax rate would be capitalized into a lower selling price. Because the LVT levy on vacant and underimproved properties results in a higher tax than the conventional single-rate tax, the sales price is effectively reduced, giving reluctant owners the incentive to sell or develop. Over time, LVT exerts a downward pressure on the selling price of land parcels, thereby lowering the effective cost of purchase and development.
LVT is a potent financial tool, unleashing the power of the market. A land-weighted property tax lowers the tax on buildings, leading to a greater city-wide supply of housing. The incentive effects will also discourage land speculation.
Research conducted by Common Ground – OR/WA has shown consistently that LVT mostly benefits multifamily developments because the ratio of improvement value to land value is typically higher than other land uses. We have also demonstrated that a change to land value taxation would benefit conversions from single family to moderate density structures, saving owners thousands of dollars in annual property taxes as compared to Oregon’s current tax system that taxes structures heavily.
Summary
This paper has assembled three public policy initiatives which, when implemented in progression, are expected to help cities reach the goal of meeting the pent-up demand for more and affordable housing.
Our proposition is this: broad-scale zoning and its evolving manifestation––the elimination of single-family zoning, will expand opportunities for ‘middle housing’ without exerting an upward pressure on land values. The right of first refusal will move more existing and some new housing units into the non-speculative quasi-public sector. The land value tax will both increase the availability of sites for new development and benefit the construction of higher density housing.
Tom Gihring, Research Director
Common Ground – OR/WA
